AICPA Submits Comments on IRS Uncertain Tax Position
Proposal . Published June 03, 2010
On June 1, the AICPA submitted comments to the IRS on the
Service’s proposal to require certain business taxpayers to disclose
their uncertain tax positions on their tax returns. The comments raise
concerns the AICPA has with the proposal and make several
recommendations to the IRS. In its comments, the AICPA urges the
IRS to withdraw the proposal and focus on existing disclosure
mechanisms that already supply information to the Service. However,
if it does move forward with the proposal, the AICPA encourages the
IRS to change its proposal so that fewer taxpayers are affected and to
rethink its most burdensome aspects.
Background
On Jan. 26, the IRS announced it plans to make changes to how
certain business taxpayers report uncertain tax positions
(Announcement 2010-9). Under the proposal, business taxpayers with
total assets of more than $10 million will be required to file new
Schedule UTP, Uncertain Tax Position Statement, if they have one or
more uncertain tax positions.
Draft Schedule UTP was released for comment on April 19
(Announcement 2010-30). It will be required for 2010 tax years and will
require affected taxpayers that file Forms 1120, 1120-F, 1120-L, or
1120-PC to disclose details about each uncertain tax position.
Uncertain tax positions include tax positions for which the taxpayer or
a related entity has recorded a reserve in its audited financial
statements under FASB Interpretation no. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, or other accounting standards, and tax
positions taken by a corporation in a tax return for which a reserve has
not been recorded by the corporation or a related party based on an
expectation that the position will be litigated or that IRS administrative
practice is not to examine the position. Taxpayers will also be required
to disclose the maximum amount of potential federal tax liability
attributable to each uncertain tax position (determined without regard
to the taxpayer’s risk analysis regarding its likelihood of prevailing on
the merits).
Passthrough and tax-exempt entities are excused from the Schedule
UTP filing requirement for 2010, but in Announcements 2010-9 and
2010-17 the IRS raised the possibility of requiring such organizations
to file Schedule UTP in the future.
AICPA Concerns
The AICPA’s concerns about the proposal focus on six areas:
 The proposal potentially undercuts the integrity of the financial
statement process;
 It will impose an increased burden and cost on taxpayers
substantially disproportionate to any actual benefit to the IRS;
 It will create a new tension among and between taxpayers, tax
advisers and the IRS, and alter the current self-assessment
system;
 It will produce complexity and result in distortions that will impede
the stated IRS goals;
 It will disproportionately impact small businesses; and
 It calls for taxpayer reporting at a higher level than mandated by
Congress.
Financial Statements
While the IRS’ proposal does not change financial reporting rules, the
AICPA believes it will work at cross-purposes to the financial reporting
rules. The AICPA is concerned that because the IRS proposal requires
disclosure of tax positions for which a financial statement reserve is
required, this may influence the decision whether to establish a
financial statement reserve. The AICPA recommends that the criteria
for disclosing uncertain tax positions should be based solely on the
technical merits of the tax position, and not on whether the company
has recorded a financial statement reserve. The AICPA believes this
would be more consistent with the IRS’ stated policy of restraint and
would clearly separate uncertain tax position reporting from decisions
made for financial statement purposes and recorded in tax accrual
workpapers.
Increased Burdens and Costs
The AICPA disputes the IRS’ premise that reporting uncertain tax
positions will involve merely transferring data from financial statements
to the Schedule UTP and believes the actual process will be more
complicated and burdensome. The requirement that taxpayers
disclose the maximum amount of potential federal tax liability
attributable to each uncertain tax position may require a new set of
calculations beyond calculations made for financial statement
purposes. The AICPA requests that taxpayers at least be allowed to
report the results of these calculations as ranges, rather than requiring
specific amounts for each item, and that they be allowed to use
reasonable estimates of the tax benefits in determining the range.
Further, the AICPA recommends that the scope of the required
disclosures be narrowed to exclude positions the taxpayer has no
intention of litigating and positions that the IRS has a general
administrative practice of not examining. The AICPA also recommends
that disclosure not be required for items that have an immaterial effect
on federal tax liability or that are related to timing differences.
Small Business Impact
The AICPA also feels that the $10 million threshold should be
significantly increased because the proposal will have a
disproportionate affect on small businesses. Since many small
businesses do not have FIN 48 expertise in-house, they will either end
up making inadequate disclosures or be required to spend money to
hire an external adviser to prepare disclosures. The AICPA reports
that small businesses are concerned about the increased costs of
audits and return preparation under the proposal, as well as the
increased IRS scrutiny and liabilities to which inadvertent omissions
will expose them.
To lessen the number of small businesses affected by the proposal,
the AICPA recommends increasing the threshold to include only
taxpayers who have assets in excess of $50 million and annual gross
receipts in excess of $100 million.
When draft Schedule UTP was released, passthrough and tax-exempt
entities were excused from the filing requirement for 2010. The AICPA
recommends that passthrough and tax-exempt entities generally be
exempted from the uncertain tax position reporting requirement.
Proposal Requires a Higher Reporting Level Than Mandated by
Congress
The AICPA recommends that the IRS focus on improving its use and
management of the substantial amount of disclosed information that it
already possesses, rather than requiring substantial amounts of new
information.
Since Sec. 6662 already requires a taxpayer to disclose tax return
positions for which the taxpayer does not have substantial authority,
the AICPA does not think the IRS should set the disclosure bar higher
than that set by Congress.
The AICPA also recommends that the IRS conduct a pilot program
and evaluate the results before deciding whether to expand the
required reporting of uncertain tax positions.
Specific Questions
In addition to its policy recommendations, the AICPA also answered
the eleven specific questions raised by the IRS in Announcements
2010-9 and 2010-17